Holdup, Knowledge Transferability, and Productivity: Theory and Evidence from Knowledge Workers*

Abstract

This article studies how firing costs affect the productivity of knowledge workers. We develop a holdup model in which workers are essential to knowledge transfer between firms and show that if the worker's knowledge stock is sufficiently transferable to competing firms, an increase in firing costs inhibits the firm's ability to hold up the worker and thereby leads to higher effort. We consider the passage of the wrongful discharge laws in the US as an exogenous increase in firing costs and test our theory using data on patents filed at the United States Patent and Trademark Office (USPTO).